Treasury yields fall after the Fed raises rates as expected

U.S. Treasury yields pulled back Wednesday after the Federal Reserve delivered on an expected rate hike at the conclusion of their two-day policy meeting.

The yield on the benchmark 10-year Treasury note dropped by 18 basis points to 3.301% — a day after touching an 11-year high above 3.49%. The 2-year rate — which is more sensitive to changes in Fed policy — dropped more than 22 basis points to 3.216%.

The Federal Open Market Committee raised interest rates by 75 basis points, or its largest hike since 1994, in an aggressive bid to rein in inflation. The U.S. consumer price index rose by an annual 8.6% in May, its highest year-on-year increase since 1981.


Traders initially anticipated a 50-basis-point interest rate hike, but after a red hot inflation print, the market started pricing a 75-basis-point increase.

This rate hike "shouldn't come as much of a surprise, nor should the rerating higher of the path of interest rates for the remainder of 2022 and into 2023," wrote Tim Holland, CIO of Orion Advisor Solutions. "We think the market will take great comfort in the Fed affirming – through word and action – its inflation fighting credentials."

"The risk with a 75bps move in June, and the possibility of another one at the July meeting, is the Fed does indeed go too far, too fast, putting the economy at risk of recession," he said.

The Fed also indicated it sees the federal funds rate ending the year above 3%. Additionally, the central bank downgraded its GDP outlook for 2022, 2023 and 2024. The Fed sees the economy growing by less than 2% during each of those years.

Over in Europe, the European Central Bank said Wednesday it would create a new tool to address the risk of fragmentation in the euro zone.